e-HKD Pilot ProgrammePhase 1 Report
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This report and the information contained within is provided on an “as-is” basis and is for reference only.
No statement, representation or warranty of any kind is given by the Hong Kong Monetary Authority (HKMA), whether express
or implied, including as to the accuracy, correctness, completeness, title, non-infringement, reliability, security, timeliness and
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You should conduct your own enquiries to verify the information contained in this report before using it, and seek professional
advice as you consider necessary. The HKMA shall not be liable for any errors, omissions, misstatements or misrepresentations
(express or implied) concerning any information contained in or any aspect of this report.
Copyright © Hong Kong Monetary Authority | October 2023
All rights reserved.
This report was published by the Hong Kong Monetary Authority with contributions from:
e-HKD Pilot ProgrammePhase 1 Report
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Table of Contents
04 Foreword
06 Executive Summary
07 1 Introduction to Project e-HKD
09 2 e-HKD Pilot Programme
11 3 Case Studies: Potential Use Cases
3.1 Overview
3.2 Case Studies
Case Study 1: Full-Fledged Payments
Case Study 2: Programmable Payments
Case Study 3: Offline Payments
Case Study 4: Tokenised Deposits
Case Study 5: Settlement Instructions for Web3
Case Study 6: Settlement of Tokenised Assets
23 4 Evaluation
4.1 Pilot Feedback and Assessment
4.2 Technical Considerations: DLT Interoperability and Scalability
33 5 Way Forward
35 6 References
36 Appendix A: Factsheets / Supplementary Reports
37 Appendix B: Glossary
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Foreword
The world has witnessed a remarkable evolution in the way we view and use money. With the advent of,
to name a few examples, smartphone-driven transactions, virtual banking, and AI-driven customer
servicing, our expectations on how our money should work for us have continued to rise as we require
faster, more accessible, and more affordable ways of managing and using our money. Hong Kong’s
complex ecosystem of banks, fintech firms, and other industry participants has made remarkable strides
in this regard by continuously innovating in response to ever-changing market demands and trends.
In tandem with these developments, the topic of central bank digital currencies (CBDCs) continues to
permeate the central banking community, with most jurisdictions engaging in some form of work on
retail CBDCs (rCBDCs). When positioned and implemented properly, an rCBDC has the potential to
unlock unrealised economic value by transforming the ways we transact and the systems we transact on.
However, its implementation will require conscious and careful balancing with existing systems, processes
and stakeholders.
The HKMA embarked on Project e-HKD two years ago to study the case for issuing an rCBDC in
Hong Kong. Given the maturity of Hong Kong’s retail payment ecosystem, we opted for a use-case
driven approach to explore where an e-HKD could bring additional value to consumers and businesses.
The e-HKD Pilot Programme launched last year underpins the HKMA’s joint efforts with the industry to
experientially evaluate viable applications.
This report details our key findings and assessment from Phase 1 of the e-HKD Pilot Programme, and it
represents another significant milestone for Project e-HKD. Whilst the HKMA has not decided on whether
or when to introduce an e-HKD, these pilots will enrich our repository of knowledge formed under
Project e-HKD and inform our future policy decisions. We also believe that our experiences and learnings
will facilitate further research and discussion on rCBDCs among policy makers, the industry, and the
international community.
The journey that lies ahead is an exciting and rewarding one. We have fostered a culture of continued
innovation within the industry while maintaining Hong Kong’s stable, long-established banking system.
In this regard, the HKMA commits to ensuring this project addresses the challenges of today and the future.
Howard Lee
DEPUTY CHIEF EXECUTIVE
HONG KONG MONETARY AUTHORITY
e-HKD Pilot ProgrammePhase 1 Report
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Executive Summary
Central bank digital currencies (CBDCs) have gained significant traction globally, with many central
banks recognising the potential of wholesale and retail CBDCs. The HKMA has been researching CBDCs
as part of its “Fintech 2025” strategy, with a view to increasing Hong Kong’s readiness in issuing CBDCs.
The HKMA embarked on its retail CBDC (rCBDC) journey with Project e-HKD in 2021. As part of the
three-rail approach in paving the way for the potential implementation of an rCBDC in Hong Kong,
i.e. an e-HKD, the HKMA launched the e-HKD Pilot Programme in November 2022. The programme is
a joint effort between the HKMA and the industry to explore and evaluate the commercial viability of
potential use cases for an e-HKD.
This report follows the conclusion of Phase 1 of the programme, and discusses the key findings, learnings,
and the HKMA’s assessment of the conducted pilots. Phase 1 took deep dives into potential domestic
and retail use cases in six categories: full-fledged payments, programmable payments, offline payments,
tokenised deposits, settlement of Web3 transactions, and settlement of tokenised assets. 16 firms
from financial, payment and technology sectors were selected to participate.
While Hong Kong’s retail payment ecosystem currently provides consumers and businesses with a wide
range of payment options enabled by well-established and robust financial infrastructure, the pilots
under Phase 1 uncovered three areas where an e-HKD could add unique value to the current ecosystem.
These are: programmability, tokenisation, and atomic settlement. An e-HKD not only has the potential
to facilitate faster, more cost-efficient, and more inclusive transactions, but it could also unlock new types
of economic transactions. With that said, the potential and prerequisites for realising such unique value at
scale to substantiate the issuance of an e-HKD are subject to market development and further investigation.
In addition, a number of inefficiencies today are the result of longstanding business norms and processes,
rather than deficiencies in technology. An e-HKD, despite its potential use of new technologies, may not
be the cure-all to all inefficiencies.
The HKMA has not yet reached a policy decision on whether or when to introduce an e-HKD. Careful
consideration should be given to the positioning of an e-HKD, as well as the roles that the HKMA and
the industry may take up in implementing and operating an e-HKD. Other factors such as policy and
technical design as well as legal considerations will also need to be studied.
Phase 1 of the e-HKD Pilot Programme has provided valuable insight into the potential use cases for
an e-HKD, and has also raised a number of areas for future study. The HKMA will examine the identified
business and implementation issues in greater depth in the next phase of the e-HKD Pilot Programme.
e-HKD Pilot ProgrammePhase 1 Report
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1 Introduction to Project e-HKD
A selection of banknotes issued by the three note-issuing banks in Hong Kong (i.e. The Hongkong and Shanghai Banking
Corporation Limited, Standard Chartered Bank (Hong Kong) Limited, and Bank of China (Hong Kong) Limited). Cash (such
as the banknotes above, and $10 notes and coins issued by the HKSAR Government) is legal tender and an accessible and
reliable means of payment. A central bank digital currency a digital version of cash should likewise provide the same
level of accessibility and reliability in the digital economy.
__________
The Hong Kong Monetary Authority (HKMA) has
been researching central bank digital currencies
(CBDCs) as part of its “Fintech 2025” strategy,
with a view to increasing Hong Kong’s readiness
in issuing CBDCs at wholesale and retail levels
and promoting financial innovation in Hong Kong.
The HKMA’s exploration of CBDCs dates back
to 2017, when its initial focus was on wholesale
CBDCs (wCBDCs) under Project LionRock.
This project gradually expanded and evolved
into Project mBridge in 2021.
Project mBridge is a joint project between the
HKMA, Bank for International Settlements
Innovation Hub Hong Kong Centre (BISIH HKC),
and three other central banks. It explores the use
of a wholesale, multi-CBDC, distributed ledger
technology (DLT)-based platform to enable
commercial participants to conduct cross-border
business and international trade flows in an efficient
and low-cost manner. This project is well
recognised by the international financial
community, and is expected to enter a minimum
viable product (MVP) phase in 2024.
On the front of retail CBDCs (rCBDCs), the HKMA
embarked on its journey with Project e-HKD
in 2021, and has participated actively in cross-
jurisdictional projects.
The HKMA previously collaborated with BISIH
HKC and the Hong Kong Applied Science and
Technology Research Institute (ASTRI) on
Project Aurum in creating a prototype two-tier
CBDC system, which comprises a wholesale
interbank system and a retail e-wallet system.
A project report was published in October 2022.
More recently, the HKMA completed Project Sela
with BISIH HKC and the Bank of Israel, and a
report was published in September 2023.
8
This project was a joint rCBDC experiment with
a focus on cybersecurity. It demonstrated the
technical feasibility of an rCBDC architecture that
could promote competition and innovation in
digital payments, by allowing non-bank payment
intermediaries to connect directly to the CBDC
ledger of the central bank.
The HKMA also established a CBDC Expert Group
in October 2023 comprising leading academics to
support Hong Kong’s future exploration of key
policy and technical issues surrounding CBDCs,
such as privacy protection, cybersecurity, and
interoperability. This group facilitates collaboration
between the government, industry and academia
on CBDC research as well.
On Project e-HKD, the HKMA has conducted two
rounds of market consultations, one on high-level
technical designs, and the other on key policy
and design issues
1
. Respondents were generally
receptive to an e-HKD, although they highlighted
the need to study the commercial viability of use
cases and other issues such as privacy protections
and legal considerations.
Taking into account feedback received during
the market consultations, the HKMA published a
position paper in September 2022
2,
to set out its
policy stance and outline a three-rail approach
for the potential implementation of an e-HKD (see
Figure 1). Given the plethora of convenient retail
payment options in Hong Kong, an e-HKD would
need to add unique value to the current payment
ecosystem, for instance, by providing new or
innovative use cases. In this regard, the HKMA has
adopted a use-case driven approach, and launched
the e-HKD Pilot Programme as a key component
of Rail 2 to explore commercially viable use cases
for an e-HKD in collaboration with the industry.
This report follows the conclusion of Phase 1 of
the programme, and discusses the key findings,
learnings, and the HKMA’s overall assessment of
the conducted pilots. Phase 1 focuses on domestic
and retail use cases in six categories: full-fledged
payments, programmable payments, offline
payments, tokenised deposits, settlement of Web3
transactions, and settlement of tokenised assets.
The HKMA has not yet reached a policy decision
on whether or when to introduce an e-HKD.
The lessons learnt from the programme will
provide important insights that will inform the
HKMA in making its decision. The HKMA remains
open-minded towards the design features of an
e-HKD, and will continue to follow international
developments on CBDCs closely and consider
feedback from different stakeholders (in particular
the industry and the general public).
1
See “e-HKD: A Technical Perspective” (October 2021) and “e-HKD: A Policy and Design Perspective” (April 2022)
2
See “e-HKD: Charting the Next Steps” (September 2022)
Figure 1 Three-Rail Approach for the Potential Implementation of an e-HKD
e-HKD Pilot ProgrammePhase 1 Report
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2 e-HKD Pilot Programme
This section discusses the HKMA’s engagement with the industry under
the e-HKD Pilot Programme and the launch of the e-HKD Sandbox
for the development of use cases.
__________
The HKMA launched the e-HKD Pilot Programme
in November 2022 and invited industry participants
to submit potential use cases for an e-HKD.
There was substantial interest and engagement
from the industry. Submissions were received from
both domestic and global firms, ranging from small
fintech firms to large financial institutions.
Following an assessment based on pre-defined
criteria (see Figure 2), the HKMA decided to focus
on domestic and retail use cases in Phase 1 of the
e-HKD Pilot Programme. Other use cases which
were received (such as corporate use cases) may
be explored in future phases of the programme.
16 firms from financial, payment and technology
sectors were selected by the HKMA to participate
in Phase 1. Their use cases spanned six categories,
namely: full-fledged payments, programmable
payments, offline payments, tokenised deposits,
settlement of Web3 transactions, and settlement
of tokenised assets. A commencement event was
hosted on 18 May 2023 to kick-start the pilots.
For Phase 1, pilot participants were granted
flexibility in determining the scope of features,
technical design, and other design aspects of
a hypothetical e-HKD for use in their pilots.
In this connection, participants were granted
the option of using the e-HKD Sandbox. This
sandbox is based on Project Aurum, and it was
developed and launched by the HKMA in
partnership with the Hong Kong Applied Science
and Technology Research Institute (ASTRI).
It offers a technical environment to accelerate
prototyping, development and testing, and is
intended to enable participants to deep dive
into their use cases, examine implementation
and design issues relating to an e-HKD, and
gain actual experience.
Participants also had the option of using the
HKMA’s Fintech Supervisory Sandbox (FSS).
The FSS allows banks and their partnering
technology firms to conduct pilot trials of their
fintech initiatives involving a limited number of
participating customers, without the need to
achieve full compliance with the HKMA’s
supervisory requirements.
Whilst participants were granted flexibility by
the HKMA in designing a hypothetical e-HKD
for use in their pilots, their designs may not
necessarily translate into the final design of an
e-HKD, should it be issued. A number of relevant
technical considerations are discussed in this report.
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Forefront of
innovation
The solution should showcase
innovative elements and differ
significantly from existing market
offerings (such as a new business
model, market, or version of an
existing product).
Customer-centric
The solution should enhance the
overall customer experience or
solve their existing pain points.
Readily testable
The solution should allow for
market testing with sele
ct group(s)
of customers. Relevant risks
should be identified with
appropriate mitigants in place,
and sufficient resources including
capital and manpower
should be committed.
Regulation-
compliant
The solution should
be compliant with existing
licensing requirements.
Hong Kong-
centric
The solution should maximise
the
potential use of an e-HKD.
Figure 2 – Assessment Criteria for Use Cases
e-HKD Pilot ProgrammePhase 1 Report
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3 Case Studies: Potential Use Cases
Phase 1 of the e-HKD Pilot Programme took deep dives into
potential use cases for an e-HKD in six categories, namely full-fledged
payments, programmable payments, offline payments, tokenised deposits,
settlement of Web3 transactions, and settlement of tokenised assets.
This section discusses these potential use cases as proposed by pilot
participants in the form of six case studies.
__________
3.1 Overview
A total of 16 firms were selected to participate in Phase 1, conducting a total of 14 pilots across
six categories (see Table 1)
3
. Details of each pilot may be found in the factsheets / supplementary
reports prepared by pilot participants, accessible via the links in Appendix A.
Table 1 Summary of Pilots by Category and Participant
Category Pilot Participant(s)
(1) Full-Fledged Payments
The Hongkong and Shanghai Banking Corporation Limited
(2) Programmable Payments
Alipay Financial Services (HK) Limited
4
ARTA-Emali HK Limited
Bank of China (Hong Kong) Limited
China Construction Bank (Asia) Corporation Limited
Hang Seng Bank Limited
4
(3) Offline Payments
Giesecke+Devrient
Standard Chartered Bank (Hong Kong) Limited
Industrial and Commercial Bank of China (Asia) Limited
(4) Tokenised Deposits
Hang Seng Bank Limited
The Hongkong and Shanghai Banking Corporation Limited
Visa Inc.
(5) Settlement of Web3 Transactions
Mastercard Asia/Pacific Pte. Ltd.
(6) Settlement of Tokenised Assets
Fubon Bank (Hong Kong) Limited
Ripple Labs Inc.
Boston Consulting Group
HKT Payment Limited
ZA Bank Limited
3
A number of pilots have evolved beyond their original category since the HKMA’s announcement on 18 May 2023 and
this has been reflected accordingly.
4
AlipayHK and Hang Seng Bank have each conducted two pilots under the category of “Programmable Payments”.
12
3.2 Case Studies
This section discusses the potential use cases for
an e-HKD as proposed by pilot participants in the
form of six case studies. These pilots are neither
indicative nor definitive of the functionality,
architecture or positioning of an e-HKD, should
it be issued. These use cases are only intended to
facilitate the HKMA and the industry in evaluating
the commercial viability of an e-HKD. Furthermore,
neither this report nor the pilots are conclusive
of any resulting roles or responsibilities that
different stakeholders (such as the HKMA and
the Government of the Hong Kong Special
Administrative Region (HKSAR Government))
may take up in implementing and operating an
e-HKD, should it be issued.
Case Study 1: Full-Fledged Payments
Physical cash is the only type of central bank money
available to the general public today. An e-HKD
would be a new form of central bank money
and akin to a “digital cash”, preserving the same
characteristics as physical cash such as negligible
transaction cost and instantaneous settlement
finality. An e-HKD would also serve as a full-fledged
payment alternative, enabling money to be stored
and transferred in a similar manner to physical
cash and other electronic means of payments
(such as via the Faster Payment System (FPS),
credit cards, and e-wallets).
In addition to these baseline characteristics, an
e-HKD could potentially enable payments to be
settled in a cost and time-efficient manner by
bypassing intermediaries typically involved in an
electronic payment flow. Currently, merchants may
not receive funds in real-time, and may also be
exposed to reconciliation errors in the event of
erroneous transactions. This is often due to a
5
Blockchain is a type of distributed ledger technology (DLT). DLT refers to a technology architecture where a ledger is
replicated across multiple entities, allowing records to be simultaneously accessed, validated and updated.
6
A smart contract refers to an agreement between participants where the terms, predetermined conditions and outcomes
have been coded into a computer program, enabling the agreement and its associated outcomes to be automatically executed
when certain conditions have been met.
7
An API is a software interface enabling two or more programs (which may be running on the same or different systems) to
communicate with each other.
8
When a customer instructs their bank to make a recurring payment, the bank programs related conditions (such as the
frequency of payments) into their own system, which then initiates the payments as specified. The resulting payments do not
contain these conditions.
lengthy payment chain and the use of net
settlement for card networks and similar solutions
(for instance, settling once a day at day-end).
HSBC explored in their pilot the use of a private
blockchain
5
network to transact hypothetical e-HKD
between consumers and merchants, with the
objective of testing instant, final settlement at a
transaction level. This can remove the need for
frequent liquidity management payments for
settlement purposes. Through this network, both
consumers and merchants would be able to bypass
today’s intermediaries to enjoy a quicker and more
efficient settlement process, as well as potentially
lower transaction costs.
Case Study 2: Programmable Payments
Programmable payments allow conditions to
be imposed to govern when and how payments
should be initiated. Such conditions are typically
implemented through the use of a smart contract
6
in conjunction with application programming
interfaces (APIs)
7
. Programmable payments are
not new and are already used to facilitate direct
debit and recurring payments. However, in their
current form, they only support simple and
unidirectional payments (such as bill payments
8
)
which are triggered regardless of whether the
underlying service has been provided.
In contrast, smart contracts enable consumers
and businesses (such as merchants) to directly
embed instructions into an electronic contract to
initiate payments once pre-defined conditions
are fulfilled. These conditions could include the
amount to be paid and the frequency of payments
in relation to the level of service provided.
Smart contracts also allow for the multidirectional
e-HKD Pilot ProgrammePhase 1 Report
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exchange of information on whether the said
conditions have been fulfilled. This could enable
the release of a payment to be automatically
performed once the consumer has electronically
acknowledged receipt of a service.
Programmability Concepts
“Programmable payments” are often explored
by central banks in conjunction with the concept
of “programmable money” for two different means
of implementation. Both of these concepts fall
under the umbrella of “programmability”, which
generally refers to the ability of a software
application or hardware device to accept and
execute a set of code. However, in the context of
payments and related concepts, “programmability”
is considered ill-defined.
In programmable payments, the money that is
transferred merely serves as a form of value.
Although such payments are only initiated as a
result of fulfilling certain pre-defined conditions,
there are no restrictions imposed on how the
money can be spent. This also means that the
integrity of a payment can be compromised if there
are issues like loss, fraud or errors at the point of
initiation. This is in line with how physical cash and
electronic payments work today, where physical
and electronic controls are typically implemented
to control access to money, but the money can
generally be used for any purpose as long as it is
in one’s possession.
In contrast, programmable money involves
embedding the pre-defined conditions into the
money itself, meaning that it will retain its pre-
defined conditions regardless of who it is
transferred to. Typically, these pre-defined
conditions are used to restrict how the money can
be spent. An analogy is a store-purchased voucher
that can only be used on certain goods within the
store, regardless of who is holding the voucher.
9
Although this case study is titled “Programmable Payments”, this report does not distinguish whether a given pilot makes use
of a hypothetical e-HKD as a programmable payment or a programmable money (along with any other related concepts). It also
does not indicate or conclude which concept may apply to an e-HKD.
10
The term “programmable e-HKD” applies solely in the context of this report, and refers to a hypothetical e-HKD incorporating
programmability features.
11
An escrow is where a trusted agent to one or more parties to a transaction holds assets (such as funds and securities) and
only releases them when conditions have been met.
Whilst this characteristic of embedding in
programmable money can be operationally
beneficial, a programmable money may potentially
undermine the public’s trust in the legal tender.
Given the restrictions on how and when it can
be spent, it could be considered less valuable
compared to other forms of money such as
physical cash. Furthermore, it may not be easily
transferrable into a less restricted form of money.
The topic of what constitutes programmable money
as well as whether central banks should issue
programmable money is a controversial one, and
entails legal issues which will require further study
9
.
With this in consideration, a programmable
e-HKD
10
incorporating smart contract functionality
could unlock new modes of business transactions
between consumers and businesses, and encourage
wider adoption of conditional settlements for
retail payments. Conventional payment systems
currently lack functionality to allow for this level
of programmability at scale, particularly in the
retail space. In the institutional space, escrows
11
enable complex transactions to be performed in
accordance with pre-agreed conditions, but
they entail substantial overhead and complexity
since the escrow agent has to manually validate
each condition and effect the resulting actions
and payments.
Consumer Protections
A programmable e-HKD could improve consumer
protections and promote trust between consumers
and businesses by leveraging the rich functionality
of smart contracts.
In Hong Kong, smaller merchants tend to prefer
cash in advance for goods/services, as it benefits
the merchant in terms of cash flow. However, this
exposes the consumer to the risk of losing their
funds, or the risk of the merchant not delivering
the promised goods/services (such as in the event
of bankruptcy or merchant malpractice).
14
In this regard, a programmable e-HKD could offer
an option for consumers to make phased payments
for goods/services and to safeguard their funds.
(1) China Construction Bank (Asia) (CCB (Asia))
and (2) Bank of China (Hong Kong) explored in
their pilots the viability of a retail escrowproduct
using a hypothetical e-HKD for holding consumer
prepayments towards the purchase of a good
or service (see Figure 3). An e-HKD could enable
escrow to be scaled as no agent is needed to
manually perform validation and payment release.
After the consumer has prepaid their funds,
the funds can be held in escrow and disbursed
automatically to the business only when the
conditions have been satisfied.
This creates an incentive for the business to
maintain a good level of service and build strong
initial consumer trust, as they have yet to receive
the funds (but they can ascertain the consumer
has paid). This in turn means that in the event of
a business default, the consumer is no longer
exposed to the risk of losing their funds.
CCB (Asia) also explored the use of a hypothetical
e-HKD for subscriptions which operate in a similar
manner to prepayments where instead of an
upfront prepayment, a recurring amount is
disbursed to the business with the option of
triggering a refund mechanism as needed.
Whilst some businesses may view escrows to
be operationally intensive, willing businesses may
use this to demonstrate integrity and differentiate
themselves from other businesses to attract
potential business (especially when the business
is building initial consumer trust). However, without
the benefits of advanced cash flows, merchants may
have to adjust their pricing or financing models.
Loyalty Programmes and Targeted Spending
A programmable e-HKD could enable merchants
to elevate their loyalty programmes, obtain better
consumer insights, and enhance their targeted
marketing spending.
The current retail payment ecosystem places
the onus of building, tracking and executing
programmes solely on the merchant, requiring
them to either engage a service provider to
integrate these services into their payment
channels, or dedicate operational and technical
resources to manually apply discounts and track
rewards for each transaction. Larger merchants
are, as a result, at an advantage as they benefit
from economies of scale in terms of consumer
insights, resources and tools to determine how
to best deploy their programmes.
A programmable e-HKD could level the playing
field for smaller merchants by providing low-cost
access to similar capabilities, such as the automatic
Figure
3 – Prepayment and Subscription using e-HKD
e-HKD Pilot ProgrammePhase 1 Report
15
dispensing and acceptance of rewards at the time
of sale. This streamlines the consumersexperience
when making payments, encouraging loyalty and
repeat business whilst freeing up operational
resources on the part of merchants. In addition,
an e-HKD could embed useful consumer identifiers
allowing merchants to better allocate targeted
spending to attract their intended consumers.
However, such new functionalities would require
businesses to have certain technical competence
in creating and maintaining the programme codes.
New infrastructure may also be needed (for
instance, to onboard and categorise merchants).
(1) Hang Seng Bank, (2) HSBC
12
and (3) AlipayHK
explored in their pilots the viability of a low-cost
alternative for merchants of all sizes to build
and execute their loyalty programmes using a
hypothetical e-HKD. Through the use of smart
contracts, merchants of all sizes can offer discount
and reward programmes to consumers without
additional ongoing effort in managing these
programmes, with the option of automatically
applying discounts at the time of sale. This in
turn enables merchants to dedicate resources to
programme optimisation instead of execution.
An e-HKD being common to financial institutions
could also enable merchants to target first-time
consumers more accurately and cost-effectively
irrespective of the payment channel or financial
institution used.
12
This is a continuation of their pilot in Case Study 1.
Investments
A programmable e-HKD could enable investors to
enjoy a faster turnaround and a closer to real-time
market price when subscribing to investment funds.
Investors typically complete a number of processes
when subscribing to a fund such as checks, pre-
funding, and order placement and settlement.
The process today of fulfilling investment fund
orders is not instantaneous, as the fund manager
is only obligated to fulfil the order by day-end after
receiving the investor’s prefunding. As a result, pre-
fulfilment steps such as obtaining a market price
for the fund may not be performed instantaneously.
ARTA-Emali explored in their pilot the atomic
settlement of a fund order using a hypothetical
e-HKD, and the ability to integrate operational
processes involving upstream and downstream
investment intermediaries (for instance, placing
agents, fund managers, fund administrators) in a
straight-through manner through the use of smart
contracts (see Figure 4). The pilot also explored the
integration of investors’ credentials with the smart
contract using decentralised identities, in order
to further streamline onboarding processes prior
to the fulfilment of an order.
Shortly after an investor initiates a fund investment
order, their e-HKD is escrowed in a smart contract-
based vault. The e-HKD is only released to the fund
manager when the fund manager delivers the
tokenised funds to the investor.
Figure 4 – Fund Investment using e-HKD
16
Under this delivery versus payment (DvP) model,
the fund manager is exposed to less risk as they
have the knowledge and confidence that the
investor has already prefunded their order. The fund
manager also has an incentive to obtain the market
price and satisfy the order as quickly as possible to
receive the investor’s funds. This mode of straight-
through atomic settlement can reduce operational
overhead. The investor in turn can enjoy faster
order execution and a timelier entry to the market,
allowing them to potentially benefit from an extra
day of interest income, say with the purchase of a
tokenised bond.
Fund Ring-fencing, Government Disbursements
A programmable e-HKD could embed fund
ringfencing and tracking functionality, enabling
funds with designated spending conditions to be
safekept, spent and tracked without requiring the
funds to be confined to a single commercial
payment channel. This can be of use where the
issuer of a given set of funds may not have a
particular affiliation with a commercial payment
channel, for instance, the government in issuing
subsidies, reimbursements and consumption
vouchers to the public. Payment recipients would
nevertheless still have their own e-HKD wallet.
There are few options today to facilitate fund
ringfencing and tracking without resorting to single
payment channels or dedicated agents (such as for
the escrow product). One such option is to disburse
the funds to stored value facility (SVF) operators,
who then configure their platforms to restrict how
the funds can be spent on their platforms. This is
13
This is a continuation of their pilot in Case Study 2, Loyalty Programmes and Targeted Spending.
operationally-intensive on the part of each SVF
operator as they have to independently configure
their platform to effect the intended use of the
funds, and they will also need to reconcile the
funds after it has been used by recipients.
Furthermore, merchants generally do not receive
the funds in real-time via the SVF, and recipients
of the funds are limited to the merchants available
on the SVF that they have selected, without an easy
option of switching their remaining vouchers to
another platform.
(1) AlipayHK and (2) Hang Seng Bank
13
explored
in their pilots a more cost and operationally-
efficient mechanism to disburse government
subsidies using a hypothetical e-HKD.
The government first programs the scope of
distribution (such as the list of whitelisted
merchants) and other relevant conditions into the
smart contract, before tokenising and distributing
the funds to designated parties for onward
distribution to the intended subsidy recipients.
This streamlined process enables the issuer of
the funds (being the government in these pilots),
SVF operators (as the case may be) and merchants
to lower their cost of implementation, and also
enables merchants to receive funds in real-time
as the smart contract configured by the
government is updated in real-time when the
voucher recipient spends the subsidy. This can
enable both the government and subsidy recipients
to enjoy greater visibility of their use of funds,
whether at the programme or individual level.
e-HKD Pilot ProgrammePhase 1 Report
17
Case Study 3: Offline Payments
In-person transactions settled through electronic
means of payments in real-time generally require
network connectivity. Despite high cellular network
penetration in Hong Kong, an intermittent or lack
of network connectivity in some situations could
prevent the use of an electronic means of payment
which relies on real-time validation (such as a
payment terminal supporting settlement using a
credit card or mobile wallet). This can ultimately
impact the customer experience and transaction.
This also applies to consumer-business transactions
and peer-to-peer transactions.
Similarly, whilst smartphone penetration in
Hong Kong has already reached 97% as of 2022,
certain segments of the population may not have
access to a smartphone, or prefer to conduct
transactions in-person using cash. This could be
the result of ingrained behaviours, a steep learning
curve, or upfront and ongoing costs. This applies
equally to businesses that may be reluctant or
even unable to justify electronic means of
payments, given that cash already satisfies their
current needs by enabling them to settle in an
intuitive and resilient manner.
14
NFC allows for the contactless communication between devices over short distances and is often triggered by holding the
NFC reader of two devices closely together.
15
This is enabled by cryptography, software and hardware-level protections. This asynchronous characteristic would typically
be guarded against fraudulent transactions initiated by malicious actors by assigning a digital signature to each digital wallet
owner (such signature being computationally infeasible for malicious actors to replicate). Each transaction would need to be
digitally signed and validated before it can be posted onto an e-HKD digital wallet or network.
16
A dual offline payment is when both parties to the transaction are offline.
Accordingly, whilst an e-HKD could serve the role
of a “digital cash” as discussed in Case Study 1,
it may not be the sole solution to overcome the
inertia of some consumers and merchants in
adopting electronic payments. Other factors could
also dilute the value proposition of an e-HKD,
like charging fees to create incentives for merchant
acquirers and technical service providers (involved
in using and supporting an e-HKD ecosystem).
(1) Standard Chartered Bank (SCB) and
Giesecke+Devrient (G+D) and (2) ICBC (Asia)
explored in their pilots the storage and transacting
of e-HKD via physical and electronic mediums for
transactions between consumers and businesses
across offline and online contexts (see Figure 5).
A hypothetical e-HKD is stored using secure
elements within smartphone wallets and physical
smart cards. This can then be transacted offline
using proximity-based technologies such as near-
field communications (NFC)
14
with safeguards
against double-spending
15
. These offline
transactions are settled with finality and funds
can be used immediately in subsequent offline
transactions. This is in contrast to certain payment
schemes where transactions are reconciled at day-
end and netted for settlement later.
In SCB and G+D’s pilot, the mediums are designed
to enable secure and consecutive dual offline
payments
16
in persistently offline settings. This
allows for funds settled offline to be immediately
available for use in subsequent offline transactions,
with the flexibility of allowing offline payments to
be synchronised online in a seamless manner when
connectivity is available.
Figure
5 – Offline Payments
18
Case Study 4: Tokenised Deposits
“Tokenised deposits” is a developing area
relating to tokenisation
17
. It currently does not
have a universal industry definition or standard,
but is generally understood to refer to digital
representations of bank deposits where money
deposited with a bank is minted
18
on that
institution’s own blockchain ledger with the backing
of that financial institution‘s balance sheet
19
.
When a depositor transfers their tokenised
deposits to another institution, the institution can
hypothetically make an interbank transfer using a
wholesale CBDC (wCBDC) to the beneficiary’s
financial institution on the HKMA’s ledger whilst
simultaneously burning the token on their own
ledger. Like bank deposits today, tokenised
deposits are intended to be a claim on the relevant
bank and not the central banking institution.
Whilst tokenised deposits and e-HKD are
conceptually separate in terms of backing, and
tokenised deposits may be issued without involving
an e-HKD, this case study pools these together
to examine how different tokenised deposit
implementations could be integrated within
the same ecosystem.
17
Tokenisation (in the context of blockchain technology) refers to the process of converting the ownership rights to an
asset into a digital form.
18
Minting refers to the process of creating new tokens, whilst burning refers to the process of destroying existing ones.
19
The use of the term “tokenised deposit” and the characteristics described in this report in relation to a “tokenised deposit”
apply solely in the context of the pilots described in this report, and are not intended to indicate or conclude what constitutes
a “tokenised deposit”.
Tokenised deposit payments bear many similarities
to today’s processes in effecting interbank transfers.
Nevertheless, they can facilitate financial institutions
in enabling their consumers and business users to
reconcile transactions faster and with greater
transparency through richer, end-to-end integration
across different systems. This is in contrast to
existing payment processes and systems which
may not provide the same level of end-to-end
integration. Financial institutions and other
intermediaries may also apply additional checks
on payment receipts resulting in funds not being
immediately credited to say, a business.
In addition, payments may not be supported
post business hours or during the weekend.
Transacting parties may also be required to
manually track and complete costly reconciliations.
As a result, transacting parties may incorporate
additional processes to manage liquidity, reconcile
flows based on different data sources, and prepare
onward payment instructions for processing.
These processes can unpredictably prolong the
execution of a business transaction.
Tokenised deposits have the potential to transform
transactions in terms of visibility and execution efficacy,
by enabling transacting parties to integrate separate
processes, stakeholders, and data points into a
unified, end
-to-end flow.
e-HKD Pilot ProgrammePhase 1 Report
19
In a global first, Visa alongside Hang Seng Bank
and HSBC explored in their pilot the atomicity
and interoperability of on-us
20
and cross-chain
payments across a variety of business scenarios
using tokenised deposits (see Figure 6).
Where tokenised deposits are used in conjunction
with a hypothetical wCBDC, transactions could
potentially be settled around-the-clock and in an
atomic manner from end to end. This represents an
improvement compared to the limited availability
of conventional payment systems
21
and the variable
number of dependencies imposed by intermediaries
in further processing the transactions. This in turn
improves liquidity management for the transacting
parties because of reductions in settlement times
and collateral usage, and enhances the overall level
of transparency by allowing transacting parties to
check the status of the transaction in real-time and
identify pending transactions for follow-up.
The use of a global correspondent network built
using distributed ledger technology (DLT) also
opens the use of tokenised deposits beyond just
payments. A programmable token for financial
institutions to integrate into their own workflows
20
On-us refers to a payment where the initiating and receiving financial institution are the same and there is no interbank
movement of funds. This is also referred to as a book transfer.
21
Excluding the FPS where retail peer-to-peer transactions are expected to be credited to the recipient in real-time.
could also be useful for expanded intrabank
use in the future such as intragroup liquidity
management and accounting.
Case Study 5: Settlement Instructions
for Web3
Web3 is the overarching theme for the next
generation of the internet, with a focus on the
concepts of decentralisation, tokenisation and
blockchain-based platforms. It has led to the
emergence of new types of transactions involving
decentralised applications and digital assets
such as non-fungible tokens (NFTs). Depending on
the marketplace or exchange, many platforms may
only accept cryptocurrenciesand stablecoins
which may not be readily accessible. Furthermore,
off-chain funding arrangements via fiat may entail
lengthy and complex processes.
In this regard, an e-HKD could act as a bridge
between the conventional fiat economy and
the new Web3 economy, and in turn promote the
development and adoption of Web3. To facilitate
this, an e-HKD could support direct integrations
with decentralised applications and blockchain
Figure 6 – Tokenised Deposits with wCBDC Settlement
20
networks, to allow for more seamless funding into
and withdrawal out of Web3.
Mastercard explored in their pilot the wrapping
22
of e-HKD for use on a non-native blockchain (see
Figure 7), by simulating the purchase of physical
items and the contingent exchange of NFTs (each
representing a digital certificate of authenticity for
the physical item) on a tokenised asset network.
This network is a non-native blockchain from the
perspective of the e-HKD.
The process of wrappingenables the value of
the e-HKD to be safely used on such network by
intended parties away from its native platform.
In addition, the use of a smart contract also ensures
that the payment is contingent on the successful
delivery of the physical item.
22
As blockchains may not always be interoperable, wrapping refers to the conversion process into a token for use on another
blockchain. In Mastercard’s pilot, it is assumed that the e-HKD is based on blockchain architecture.
23
Fractionalisation refers to the concept of dividing an asset into smaller units, where each unit represents a proportional
ownership of the asset. This allows more than one person to benefit from the asset (in proportion to what they own).
Case Study 6: Settlement of Tokenised Assets
Tokenisation has begun to make inroads into the
conventional economy, with an increasing number
of real world assets eligible for representation in
a digital form.
Through tokenisation, asset owners may discover
new buyers for their assets and be able to engage
more than one buyer as a result of being able
to fractionalise
23
their assets. In addition, potential
buyers would have greater visibility into the details
and transaction history of each asset, providing
them with greater assurance and certainty.
Tokenisation could also be used to represent
legal rights to assets such as title deeds, although
regulatory changes may be needed to facilitate this.
The market for tokenisation is still in its early stages,
and there are many opportunities across asset
classes which have yet to be realised. Where there
is a business case, tokenisation has the potential
to drive the next wave of economic activities.
Figure
7 – Settlement in Web3 using e-HKD
e-HKD Pilot ProgrammePhase 1 Report
21
Fubon Bank and Ripple explored in their pilot the
use of tokenised real estate assets
24
in granting a
home equity line of credit (HELOC)
25
to a real estate
owner using a hypothetical e-HKD (see Figure 8).
When the lending protocol is triggered, property
lien tokens are used as collateral by the bank in
minting a residential mortgage loan, and the loan
amount for drawdown is then credited to the owner
in e-HKD. The process today is operationally-
intensive for lenders and can span multiple systems.
In this connection, the model of token-backed
lending could enable lenders to provide a more
efficient service to potential real estate owners to
realise additional liquidity, which can in turn
encourage uptake of such facilities.
In a similar vein, BCG, HKT Payment Limited and
ZA Bank explored in their pilot the tokenisation
of pledging rights to an asset, and the feasibility
of developing a token-backed secured loan.
The transaction is settled using a hypothetical
e-HKD, and the funds are ringfenced for the pre-
agreed purposes. By tokenising and fractionalising
such rights, borrowers may borrow from more than
one lender (akin to a “retail syndication loan
26
)
at different interest rates. Borrowers may also be
able to obtain secured lending for smaller nominal
amounts than if they were to borrow from a single
lender. In essence, tokenisation could enable
borrowers to access different lending options and
terms. This could also create a market for smaller
property-backed loans that banks would not
typically entertain. In addition, this model of token-
backed lending could apply to other asset classes,
unlocking liquidity for a range of assets.
Furthermore, it is currently difficult for lenders to
enforce how loan proceeds are spent after their
disbursement. Given that a programmable e-HKD
could facilitate ringfencing of the proceeds, lenders
may be able to offer more competitive interest rates
for loans issued using an e-HKD, as they would be
less exposed to the risk of the loan proceeds being
used for prohibited purposes.
24
In Fubon Bank and Ripple’s initial implementation for their pilot, the tokens represent the property liens for the real estate.
25
A HELOC is a credit facility extended to a real estate owner allowing them to borrow against (or draw down from) excess
equity in their property.
26
Syndication loans are typical for large value institutional transactions due to the interest of multiple parties in financing the
loan, but are less common in the retail space.
Figure
8 – Tokenisation of Real Estate Assets
22
e-HKD Pilot ProgrammePhase 1 Report
23
4 Evaluation
This section sets out the HKMA’s overall assessment of the potential
use cases for an e-HKD and related technical considerations following
Phase 1 of the e-HKD Pilot Programme.
__________
4.1 Pilot Feedback and Assessment
Hong Kong’s retail payment ecosystem currently
provides consumers and businesses with a wide
range of means to make and receive payments,
and this is enabled by well-established, well-
connected and robust financial infrastructure such
as the Faster Payment System (FPS). With this
in consideration, an e-HKD would need to provide
additional unique value to the current retail
payment ecosystem to substantiate the case for
its issuance, such as applications which can only
be supported by an e-HKD.
There are also settlement inefficiencies today which
are the result of longstanding business norms and
processes, rather than deficiencies in technology.
These inefficiencies will need to be addressed to
realise the full potential of new technologies,
and cannot be solved solely by issuing an e-HKD,
despite the technical benefits that it may bring.
Based on the learnings and feedback from pilot
participants, including those from users involved
during the pilots, Phase 1 of the e-HKD Pilot
Programme uncovered three key areas where an
e-HKD could add unique value to consumers
and businesses and address their evolving and
future needs. These are: programmability,
tokenisation, and atomic settlement.
It should, however, be noted that the realisation
of such unique value in the pilots may have been
made possible by the presumed existence of the
relevant prerequisites, such as the readiness of
other participants and supporting arrangements in
the ecosystem. However, the potential for realising
27
In contrast, “closed-loop systems” would require transacting parties to use the same means of payment.
such unique value at scale to substantiate the
issuance of an e-HKD would very much depend
on the pace of relevant developments in the retail
payment ecosystem, and accordingly would be
subject to further investigation.
4.1.1 Programmability
Programmability generally refers to the ability of
a software application or hardware device to
accept and execute a set of code. As this term is
considered ill-defined in the context of payments
and related concepts, the term “programmable
e-HKD” is used solely in the context of this report
to refer to a hypothetical e-HKD incorporating
programmability features.
Wider adoption of retail conditional settlements
A programmable e-HKD could unlock new types
of transactions for consumers and businesses, by
facilitating the wider adoption of conditional
settlements for retail transactions. This could
create mutual incentives for transacting parties
to complete the transaction in a timelier manner,
which could be useful for certain interactions where
consumers are used to paying in advance.
An e-HKD could also facilitate open-loop system”
conditional settlements, where related payment
conditions can apply regardless of the means
used to make the payment. This means transacting
parties can benefit from conditional settlements
without the limitation of having to use the same
means of payment
27
.
24
In the “Consumer Protections” pilots (under Case
Study 2, Programmable Payments), a scalable,
“retail escrow” prepayment product facilitating
conditional settlements with e-HKD could
incentivise businesses to provide good, consistent
service from the outset to build trust with
consumers, whilst providing consumers with the
confidence to engage with businesses in the
absence of initial trust. The business also provides
the good or service with the confidence that the
consumer has already made or can make payment.
In one set of surveys
28
, 93% of consumers
responded that conditional prepayments with
e-HKD could alleviate their concerns of losing their
money as a result of a merchant going bankrupt,
whilst 70% of merchants responded that conditional
prepayments with e-HKD would help build loyalty.
In the “Investments” pilots (under Case Study 2,
Programmable Payments), the investor benefits
from faster order fulfilment as the fund manager
has an incentive to fulfil the investment fund order
as soon as possible to receive the investor’s
prefunding. The fund manager is also incentivised
to facilitate conditional settlements as the unified
process enables them to incur less operational
overhead and risk.
In this connection, surveyed financial institutions
29
viewed that the benefits of atomic delivery versus
payment settlements, and reduced settlement and
counterparty risk were attractive factors supporting
this mode of conditional settlements using e-HKD.
Level playing field for businesses
A programmable e-HKD has the potential to
level the playing field for businesses, by allowing
businesses of all sizes to integrate and automate
payment-related processes, as well as to develop
and provide goods or services with a greater degree
of customisation and flexibility. This could benefit
small businesses in particular (which may be limited
by financial, operational or technical resources),
28
Survey sample: 110 consumers and 10 merchants
29
Survey sample: 12 financial institutions and a small population of investors
30
The pilot involved around 150 individual participants, five merchants, and 400+ transactions
31
The pilot involved over 150 individual participants, seven merchants, and 500+ transactions
by providing them with more means to attract new
consumer segments and build consumer rapport.
Furthermore, an e-HKD could facilitate “open-
loop system” conditional settlements, enabling
customisations to be applied regardless of the
means used to make the payment. For instance,
consumers would be able to spend vouchers issued
by merchants without the limitation of having to
use a specific e-wallet. With that said, the process
of implementing programmability will likely require
some technical expertise, and businesses will either
need to possess this expertise themselves or
partner with a financial institution or technology
partner that can assist with implementation.
In the “Loyalty Programmes and Targeted
Spending” pilots (under Case Study 2,
Programmable Payments), a low-cost alternative
using a hypothetical e-HKD could enable merchants
of all sizes to build and execute their loyalty
programmes. One benefit of note was the potential
of an e-HKD to automate the issuance, tracking
and reconciliation of vouchers and rewards.
During one pilot’s testing
30
, both consumers and
merchants found the mechanism to automatically
apply rewards to consumers’ transactions easy to
use. Merchants also noted that its low cost and
ability to implement sophisticated and frequent
promotions were attractive features. In another
survey, 80% of respondents
31
had a favourable
view towards programmability being a unique
feature of an e-HKD, should it be issued.
Flexibility in ringfencing and tracking funds
Last but not least, a programmable e-HKD could
enable the ringfencing and tracking of funds to
be achieved with greater ease and less operational
overhead. Instead of distributing funds to, for
instance, stored value facilities (SVFs) which then
configure the restrictions on their platforms, the
intended use of the funds could be programmed
from the outset to govern how it can be spent
irrespective of the payment platform. This could
also enable the funds to be used across different
payment platforms, rather than being limited to a
e-HKD Pilot ProgrammePhase 1 Report
25
single payment platform. In a pilot exploring the
ringfencing of loan proceeds (under Case Study 6,
Settlement of Tokenised Assets), around 60% of
surveyed consumers showed interest in loans with
ringfenced proceeds, if it came with incentives such
as a lower interest rate.
Programmability at scale
Whilst programmability brings about a number of
commercial merits, it will be important to consider
how programmability at scale can be achieved.
This refers to the process of creating an ecosystem
with the necessary infrastructure so that businesses
are equipped with the right incentives, resources
and expertise to make the most of programmability.
It may be worthwhile to consider developing a
repository of smart contract templates for common
business activities. Technical frameworks, such
as cross-system protocols and standards for
identifying merchants, would also need to be
developed in collaboration with the industry.
Furthermore, a holistic review of how an e-HKD
could look and feel for the average consumer
would be important for consumer adoption.
This may involve identifying and specifying core
programmability functions that should be provided
to consumers via, for instance, their e-wallet’s
smartphone application. This work could serve as a
crucial foundation to accelerate industry-wide
innovation, and facilitate interoperability between
different implementations of programmability in
the future. Similar work could also be done in the
other key areas of tokenisation and atomic
settlement as discussed in later sections.
In addition, careful consideration should be given
to how the concepts of programmable payments,
programmable money (see Figure 9), or perhaps
an extension of these concepts would apply to an
e-HKD, should it be issued with programmable
features. As discussed in an earlier section, an
e-HKD issued as a programmable money could
run the risk of undermining the public’s trust in
the legal tender and in turn, affect monetary and
financial stability.
The question of whether and how central banks
should implement certain programmability features
at the time of issuing an rCBDC will also require
deliberation, as different features will entail
different levels of risk. For instance, an rCBDC
issued as a programmable money may be more
susceptible to cybersecurity risks, as it may present
more mediums for external threats to inject
malicious code. A delicate balance will therefore
need to be struck between facilitating the industry’s
development of innovative products and services,
and ensuring the overall safety of monetary and
financial systems.
Figure
9 – Programmable Payments and Programmable Money
26
4.1.2 Tokenisation
Tokenisation (in the context of blockchain
technology) refers to the process of converting the
ownership rights to an asset into a digital form
32
.
It has gained popularity in recent years, particularly
in the space of Web3 and real world assets.
When applied appropriately, tokenisation could
enable asset owners to access marketplaces with
increased liquidity, efficiency, and transparency
compared to conventional marketplaces.
Tokenisation is also used by financial institutions
in minting tokenised deposits, which are generally
understood to refer to digital representations of
bank deposits.
Backbone for Web3 transactions
An e-HKD, were it to be wrappedor even
issued on a blockchain, could be used to directly
settle transactions relating to Web3 and tokenised
real world assets. In this connection, an e-HKD
could eliminate the risk of conversion losses and
volatility associated with cryptocurrenciesand
stablecoins
33
. This is particularly relevant in Web3,
where “cryptocurrencies”, stablecoins and off-chain
arrangements are typically used for marketplace
transactions with no readily available option to
transact, say, using a HKD. In a small-scale survey
conducted with digital natives as part of the
“Settlement of Web3 Transactionscase study,
65% of respondents indicated a strong interest
in using rCBDCs for settling Web3 transactions.
The Government of the Hong Kong Special
Administrative Region (HKSAR Government) issued
a Policy Statement on Development of Virtual
Assets in Hong Kong in October 2022, noting that
an e-HKD could serve as a potential “backbone”
and anchor to bridge legal tender and virtual
assets
34
. Nevertheless, even with these benefits in
mind, businesses will still need to evaluate the
32
It is unlikely an e-HKD would be considered a token should it be issued, given it should have the same status as a
“digital cash” instead of being a digital representation of another form of money.
33
An e-HKD being an rCBDC would observe the singleness of money, where each e-HKD is always equal to a HKD
and the underlying exchange rate between these two forms of money remains constant. In contrast, the value of
stablecoins or “cryptocurrencies” is subject to fluctuations.
34
Policy Statement on Development of Virtual Assets in Hong Kong
(Government of the Hong Kong Special Administrative Region, 2022)
35
Report on Bond Tokenisation in Hong Kong (Hong Kong Monetary Authority, 2023)
marginal cost of supporting these new types of
transactions.
Central banks have also continued their study
and work on potential applications for tokenisation,
as the range of assets eligible for tokenisation
continues to expand. In February 2023, the HKMA
supported the HKSAR Government in issuing
the world’s first tokenised government green bond,
and published a report in August 2023 to share the
experience of the issuance with a view to providing
a blueprint to market participants interested in
issuing tokenised bonds in Hong Kong. The report
also outlined potential next steps to promote
the wider use of tokenisation technology in
Hong Kong’s bond market
35
.
Wider development of token-based systems
As for tokenised real world assets, an e-HKD has
the potential to enable access to increased liquidity
and accelerate the development of innovative
token-based systems within the industry.
This could lead to more integrated and faster ways
of conducting core business activities. In one
pilot relating to tokenised real estate assets,
a hypothetical e-HKD was shown to enable faster
approval of loans and consequently real-time,
around-the-clock availability, and automatic
disbursement of funds. These industry-wide
developments could serve as an impetus for
businesses to revisit longstanding norms and
processes, and address non-technical inefficiencies
as part of readying their business to adopt new
technologies to their full potential.
These efficiencies could also be achieved in
conjunction with tokenised deposits, which have
the potential to bridge different chains, systems
and applications. Although tokenised deposits and
e-HKD are separate concepts, private sector
innovations and developments relating to an
e-HKD Pilot ProgrammePhase 1 Report
27
e-HKD could be beneficial to the development of
tokenised deposits and other parts of the retail
payment ecosystem in Hong Kong. For instance,
these innovations could serve as reference for
financial institutions when designing their own
mechanisms for tokenising deposits, which could
help promote interoperability in the future.
A wholesale CBDC (wCBDC) layer could also be
established to facilitate interbank settlements.
In addition, an e-HKD could be used in a “unified
ledger”, a concept explored in greater detail by the
Bank for International Settlements
36
(see Figure 10),
where sequences of financial transactions can be
automated and seamlessly integrated onto a
common programmable platform that combines
tokenised money and tokenised assets. A unified
ledger established in conjunction with tokenised
deposits and a wCBDC layer could transform
transactions in terms of visibility and execution
efficacy, by enabling transacting parties to integrate
separate processes, stakeholders and data points
into a unified, end-to-end flow.
A comparison between an e-HKD, stablecoins,
SVFs, and tokenised deposits is provided in Table 2
in the following pages.
Figure 10 – Models for Interoperability between Old and New Systems
Payment messaging model
36
III. Blueprint for the future monetary system: improving the old, enabling the new
(Bank for International Settlements, 2023)
28
Figure 10 Models for Interoperability between Old and New Systems (continued)
Private tokenised ledger model
Full-fledged unified ledger
Source: BIS
e-HKD Pilot ProgrammePhase 1 Report
29
Table 2 – Comparison of e-HKD, Stablecoins, Stored Value Facilities and Tokenised Deposits
e-HKD
(rCBDC)
Stablecoins
Stored Value
Facilities (SVFs)
Tokenised
Deposits
Issuer
Statutory authority
Private, usually
unregulated entities
Regulated entities
registered with
the HKMA
Authorized institutions
under the
Banking Ordinance
Backing
Central bank’s
statutory authority
Generally 100%
asset-backed by fiat
currencies or other
cryptocurrencies
User float is fully
segregated from funds of
operators and protected
against claims by other
creditors of SVF issuers in
all circumstances per
supervisory requirements
Commercial bank balance
sheet fulfilling the
appropriate liquidity
coverage ratio (LCR)
Transferability
Any other user
ready to receive it
Any other user on the
network
Any other user on
the platform, and also to
users of other
FPS participants
Any other accepted user
on the network ready to
receive it, and within
the bank’s KYC/AML
risk appetite
Insurance
N/A N/A N/A
Generally protected by
the Deposit Protection
Scheme, unless otherwise
excluded
37
Redeemability
Legal tender,
exchangeable for
other forms of fiat
Generally redeemable for
fiat money or tradeable to
other users at market rate
Redeemable for fiat money
from the issuer
Repayable in
fiat money
Note: The characteristics relating to an e-HKD are not indicative and do not infer that an e-HKD will be issued. In addition,
the characteristics relating to stablecoins and tokenised deposits are not definitive and should not be interpreted as such,
given that they do not have a clear and legal and regulatory status in Hong Kong.
37
Tokenised deposits should generally be protected by the Deposit Protection Scheme unless otherwise excluded
(not all deposits are protected deposits).
30
4.1.3 Atomic settlement
Atomic settlement refers to the ability to settle
transactions and exchange assets in a simultaneous,
instant and contingent manner.
“Last-milepayment processing
An e-HKD could work in conjunction with the
current set of financial infrastructure to enable
a wider audience of consumers and businesses to
enjoy the benefits of atomic settlement across a
greater range of transactions. This in turn could
facilitate the adoption of electronic payments.
Although Hong Kong’s retail payment ecosystem
currently provides consumers and businesses
with a wide range of means to make and receive
payments, the “last mile”
38
of payment processing
in crediting funds to businesses may not always be
conducted in real-time. This can deter businesses
that have to closely manage their cash flows from
taking up electronic means of payments.
The pain point of “last mile” payment processing
is the result of business, operational and technical
factors. Whilst new technologies can facilitate the
development of faster, more efficient processes,
there is a crucial need for business stakeholders
and intermediaries to review and align their
processes and operational norms. This is necessary
to realise the full potential of efficiencies granted
by new technologies. These norms are typically the
result of past process optimisations (such as
liquidity saving arrangements), or even certain
38
In the context of payments, the “last mile” refers to the final stages of the payment process where the funds are actually
credited to the recipient (which may take place beyond a payment system such as the FPS).
commercial interests. In this connection, new
technologies could serve as an impetus for
businesses to revisit longstanding norms and
processes and address non-technical inefficiencies.
For instance, although the FPS enables real-time
settlement for peer-to-peer transactions, external
payment schemes such as credit cards may not
credit funds instantaneously due to the way these
schemes aggregate transactions for settlement.
Financial institutions may also impose additional
checks and holds on payments before crediting
the funds to businesses, or process payments in
batches instead of real-time.
In other words, the systems and financial
infrastructure which payments are settled in may
be real-time, but the intermediaries processing
the payments may not be doing so in real-time.
Businesses may also lack well-integrated systems
and processes to support real-time settlement
and reconciliation.
In addition, external payment schemes may entail
a higher cost than the processing of physical cash,
with processing fees subtracted by relevant
intermediaries. These fees may deter businesses
with thin operating margins for example, a 3%
interchange fee subtracted from a 10% margin
before other costs is substantial.
Figure
11Last Mile Processing
e-HKD Pilot ProgrammePhase 1 Report
31
Assuming that businesses are ready to support real-
time settlements and reconciliations, the potential
of an e-HKD in enabling atomic settlement can
be observed in multiple pilots. In the “Full-Fledged
Payments” case study, a hypothetical e-HKD
powered by distributed ledger technology (DLT) not
only could enable merchants to enjoy the benefits
of real-time settlements with consumers (as already
enabled by conventional payment systems), but it
could also mitigate business inefficiencies occurring
outside such systems to an extent by bypassing
intermediaries typically involved in an electronic
payment flow. Merchants may also enjoy lower
transaction fees.
Surveyed merchants held a favourable view towards
the e-HKD if it could enable intraday settlements,
instead of “T+1” (a next day settlement benchmark
generally expected of electronic payments) (see
Figure 11). Merchants noted that this facilitated
more efficient cash flow management, when say,
making daily payments to suppliers.
In a similar vein, tokenised deposits could build
on the current set of financial infrastructure,
which already enable atomic settlements at the
interbank level, and bridge settlements to achieve
near-instant, more transparent and around-the-
clock settlements. This assumes businesses and
financial institutions are ready to support end-to-
end, real-time settlements and reconciliations.
These settlements could also be conducted outside
the operating hours of conventional payment
systems. In comparison, last mile processing after
real-time settlement in conventional payment
systems took comparatively longer (measureable in
hours) and were subject to fixed operating hours.
While these new means of payment could facilitate
faster, more efficient settlements, it will be
necessary to evaluate if the additional benefits
presented could be sufficient to draw consumers
and businesses from existing means of payment.
Adoption of offline payments
An e-HKD could address last mile pain points
which may be amplified in offline settings, where
consumers and merchants may lack perpetual
access to an online network and are forced to
handle settlements offline.
For instance, dual offline payments via an e-HKD
could help facilitate atomic transactions across
offline and online contexts, and enable an e-HKD
to function as closely as possible to a “digital cash”.
In a survey conducted under the “Offline Payments
case study
39
, over 75% of consumer respondents
had a favourable view towards an e-HKD
incorporating offline functionality.
Should this be implemented, careful consideration
should be given to the implementation of robust
measures to safeguard users from the risk of
fraudulent offline transactions.
39
Survey sample: 32 consumers and 7 merchants. The pilot involved close to 200 individuals and more than ten merchants.
32
4.2 Technical Considerations: DLT Interoperability and Scalability
Whilst the focus of Phase 1 of the e-HKD Pilot
Programme is on the commercial viability of
potential use cases for an e-HKD, the HKMA
considers it necessary to discuss DLTs, given its
prevalence in the pilots under Phase 1.
DLT refers to a technology architecture where a
ledger is replicated across multiple entities, allowing
records to be simultaneously accessed, validated
and updated. DLTs can be useful where a
centralised ledger may be infeasible, such as in the
absence of a central exchange or in the absence of
mutual trust between transacting parties.
A DLT is neither a prerequisite for a CBDC nor an
e-HKD, and the HKMA remains open-minded to
both DLT or non-DLT based designs (see Figure 12).
In this connection, it would be necessary to
consider whether a DLT could support the intended
scale, level of interoperability, and use cases
without compromising performance, security
or cost-effectiveness.
A DLT-based design could be better for future
interoperability compared to a non-DLT one, as
transacting entities are likely to share a common
architecture. This could be useful, for instance,
when integrating a wCBDC with each financial
institution’s tokenised deposits, where end-to-end
integration and on-chain settlement are desired.
A DLT-based design could also enable easier
development and study of digital currencies,
as token standards relating to the issuance of
DLT tokens (such as ERC20
40
), DLT-related
applications, documentation and academic research
already exist in the public domain.
With that said, a DLT design may be less scalable
in terms of transaction throughput. A non-DLT
based design may also be easier and more
cost-effective to run and govern as it is more
aligned with today’s conventional payment systems.
The HKMA will continue to examine different
architectures for an rCBDC in conjunction with
other collaborative work and projects with the
Bank for International Settlements Innovation Hub
(BISIH) and other central banks.
40
Ethereum Request for Comments 20 (ERC20) is an Ethereum-based token standard proposed in 2015 that implements an
API for tokens within smart contracts, enabling developers to build applications interoperable with other products and services.
Figure 12Centralised Ledger versus Distributed Ledger
e-HKD Pilot ProgrammePhase 1 Report
33
5 Way Forward
This section sets out the next steps for the e-HKD Pilot Programme.
__________
Phase 1 of the e-HKD Pilot Programme has
provided valuable insights into the potential
use cases of an e-HKD, and raised a number of
research areas for future study.
One aspect requiring careful consideration is
the positioning of an e-HKD in Hong Kong’s
monetary and financial systems. This includes
understanding its role in facilitating new ways of
transacting goods and services whilst ensuring
banking, monetary and financial stability. It will
also be necessary to study how an e-HKD would
interoperate with conventional payment systems,
and to identify areas where an e-HKD could
complement the industry’s own innovations such
as tokenised deposits.
It is worth noting that launching an e-HKD will
involve external factors beyond those covered
in the pilots, given that the scale and testing
environment of these pilots are substantially
different from real world applications. While some
of the benefits identified may remain valid for a
full-scale deployment, this cannot be assumed to
always be the case. Likewise, minor frictions
identified during the pilots could become more
apparent or even unacceptable to users in a
production environment. These issues will need
to be studied further before any decision is taken.
In a similar vein, it will be necessary to study how
an e-HKD could compete in use cases where there
are existing payment solutions, and to identify other
crucial components in achieving and supporting
mass adoption of an e-HKD such as the creation
of a commercial network.
There is also a need to delve deeper into use
cases in three key areas, namely programmability,
tokenisation and atomic settlement. Continued
partnership between the private and public sector
will be important in establishing a way forward
that ensures the commercial viability of an e-HKD.
This may include establishing an optimal set of
protocols, common infrastructure and policy.
It will also be necessary to study distributed ledger
technology (DLT) and related designs in detail
given the industry’s strong interest in this area.
The next phase of the e-HKD Pilot Programme
will build on the success of Phase 1 and consider
exploring new use cases for an e-HKD. It will also
delve deeper into select pilots from Phase 1,
with a view to further examining business and
implementation issues identified during the pilots.
As part of its outreach, the HKMA will continue to
actively engage the industry, academia and other
stakeholders, as well as participate in international
fora and monitor international developments on
retail CBDCs. The HKMA will also continue its work
under Rail 1 in laying the legal and technical
foundations for an e-HKD in parallel.
Phase 1 of the e-HKD Pilot Programme has
been strongly underpinned by the joint efforts,
experience and talents of the pilot participants,
academia and other stakeholders. The HKMA
expresses its gratitude for the contributions it has
received in the process, and will continue with its
three-rail approach in preparing Hong Kong for the
possible implementation of an e-HKD in the future.
e-HKD Pilot ProgrammePhase 1 Report
34
e-HKD Pilot ProgrammePhase 1 Report
35
6 References
1. Bank for International Settlements. (2023, June 20). III. Blueprint for the future monetary system:
improving the old, enabling the new.
2. Bank for International Settlements Innovation Hub, Hong Kong Monetary Authority. (2022, October 21).
Project Aurum: a prototype for two-tier central bank digital currency (CBDC).
3. Government of the Hong Kong Special Administrative Region. (2022, October 31). Policy Statement on
Development of Virtual Assets in Hong Kong.
4. Hong Kong Monetary Authority. (2021, October 4). e-HKD: A Technical Perspective.
5. Hong Kong Monetary Authority. (2022, April 27). e-HKD: A Policy and Design Perspective.
6. Hong Kong Monetary Authority. (2022, September 20). e-HKD: Charting the Next Steps.
7. Hong Kong Monetary Authority. (2023, August 24). Report on Bond Tokenisation in Hong Kong.
8. Hong Kong Monetary Authority, Bank for International Settlements Innovation Hub Hong Kong Centre,
Bank of Israel. (2023, September 12). Project Sela: an accessible and secure retail CBDC ecosystem.
36
Appendix A: Factsheets / Supplementary Reports
Pilot Participant / Use Case QR Code / Link Pilot Participant / Use Case QR Code / Link
Alipay Financial Services
(HK) Limited
Programmable Payments
Loyalty Programmes,
Government Disbursements
Link
ARTA-Emali HK Limited
Programmable Payments
Investments
Link
Bank of China
(Hong Kong) Limited
Programmable Payments
Prepayments
Link
China Construction Bank (Asia)
Corporation Limited (CCB (Asia))
Programmable Payments
Prepayments, Subscriptions
Link
Fubon Bank
(Hong Kong) Limited
Ripple Labs Inc.
Settlement of Tokenised Assets
Real Estate Asset Tokenisation
Link
Giesecke+Devrient (G+D)
Standard Chartered Bank
(Hong Kong) Limited (SCB)
Offline Payments
Link
Hang Seng Bank Limited
Programmable Payments
Loyalty Programmes,
Government Disbursements
Link
Hang Seng Bank Limited
The Hongkong and Shanghai
Banking Corporation Limited
(HSBC)
Visa Inc.
Tokenised Deposits
Link
The Hongkong and Shanghai
Banking Corporation Limited
(HSBC)
Full-Fledged Payments
Programmable Payments
Loyalty Programmes
Link
Industrial and Commercial
Bank of China (Asia) Limited
(ICBC (Asia))
Offline Payments
Link
Mastercard Asia/Pacific
Pte. Ltd.
Settlement of Web3 Transactions
Link
Boston Consulting
Group (BCG)
HKT Payment Limited
ZA Bank Limited
Settlement of Tokenised Assets
Token-Backed Secured Loan
Link
Note: Any positions or statements made in the above factsheets / supplementary reports as prepared by pilot participants do
not necessarily represent the views of the HKMA. Furthermore, any characteristics described in the above factsheets /
supplementary reports relating to an e-HKD are not indicative, and also do not infer that an e-HKD will be issued.
e-HKD Pilot ProgrammePhase 1 Report
37
Appendix B: Glossary
Term Definition
API Application programming interface
ASTRI Hong Kong Applied Science and Technology Research Institute
BIS Bank for International Settlements
BISIH Bank for International Settlements Innovation Hub
BISIH HKC Bank for International Settlements Innovation Hub Hong Kong Centre
CBDC Central Bank Digital Currency
rCBDC Retail Central Bank Digital Currency
wCBDC Wholesale Central Bank Digital Currency
DLT Distributed ledger technology
DvP Delivery versus payment
ERC20 Ethereum Request for Comments 20
FPS Faster Payment System
FSS Fintech Supervisory Sandbox (HKMA)
HELOC House equity line of credit
HKD Hong Kong dollar
HKMA Hong Kong Monetary Authority
HKSAR Hong Kong Special Administrative Region
NFC Near-field communications
NFT Non-fungible token
SVF Stored value facility
Note: Definitions where provided are solely for indicative purposes in the context of this report, and should not be interpreted
as definitive or conclusive given that they may evolve over time.
Copyright © Hong Kong Monetary Authority
October 2023
All rights reserved.